Macro Morning

See the latest Australian dollar analysis here:

What is holding up the yuan?

The dual threats of rising inflation and the spread of the new omicron variant are spooking risk markets going into the last sessions of the trading year, with a Santa Rally definitely off the table. Wall Street fell over with European stocks having high volatility amid lower finishes while currency market volatility abated somewhat with more safe haven buying in Yen, but also Euro as USD strength waned a little. Commodity markets didn’t see any relief from selling with oil prices down more than 3%, while gold deflated back below the $1800USD per ounce level.

Bitcoin is continuing its deflation, unable to gain traction as it retraces back down to the $47K level, making a series of new daily lows last week as momentum remains nicely oversold with no upside pressure evident. The technical picture still remains grim for crypto with the next support levels are quite far away at the September lows around $43K, with daylight below to $30K next:

Looking at share markets in Asia from Monday’s session, where mainland Chinese shares put in very poor sessions to start the week, with the Shanghai Composite down over 1% to 3593 points while the Hang Seng Index slumped again, down nearly 2% to 22744 points. As this dead cat bounce turns into a full on correction, the price moves below the 23000 point level have now wiped out any support, heading to the 2020 lows (lower black line) with the potential to start a new bear market:

Japanese markets also pulled back sharply due to monetary easing comments from the BOJ, with the Nikkei 225 down over 2% to 27937 points. Price action has broken below the nascent uptrend line from the start of the month, with resistance too heavy here as daily momentum rolls over further into the negative side.  This looks like yet another failed ascending triangle within a downtrend, essentially a bull trap that should see price revert back to the 27000 point proper soon:

Australian stocks were the relative outperformers, with the ASX200 closing only 0.3% lower but looking very weak here too, closing at 7284 points. SPI futures are indicating a potential open around the 7200 point level, so its not looking good for a Santa rally as the market returns to the November lows. The daily chart does not look pretty with daily/weekly support coming up very quickly:

European markets all had lower finishes with the FTSE off by 1% while the German DAX finished nearly 2% lower at 15239 points. Intrasession volatility was very high here with even lower lows before a late recovery alongside Wall Street still saw steep losses. As I said yesterday, any falls below the low moving average indicate short term support has evaporated and with possibly more lockdowns on the continent up ahead as Christmas comes around, confidence is evaporating:

Wall Street suffered yet another loss on the OMICRON fears with the NASDAQ leading the way, down over 1.2% while the S&P500 lost over 1% closing at 4568 points. The four hourly chart is now showing the way with this dip taking its down towards the 4500 point level, although there is some hope here as a deceleration short term pattern is quite evident, with that last candle showing the BTFD team may yet be stepping in:

Currency market volatility remains high although without any economic catalysts last night there was little for algos’ to go on, with Euro experiencing a reversion to the mean trade heading it back towards the 1.13 handle. The four hourly chart shows price getting back above the previous ATR support at the mid 1.12 level that had nominally held the last few weeks, with momentum getting back to more neutral settings, but this pair is still looking weak at best with a sideways bent still evident amid the volatility:

The USDJPY pair also showed a return to it mid week point of control at just below the 114 level in a very mild lift overnight despite the interesting comments coming out of the BOJ. The four hourly chart is looking quite sanguine again with that point of control keeping prices stuck at just below the 114 handle, although a new weekly low has not yet been made, momentum remains slightly negative at best and the high moving average is not under threat to the upside:

The Australian dollar had a flat start to the week despite the surprise PBOC cutting of rates, with a weak finish just above the 71 handle overnight, not helped by more selling on commodity markets, still making for a very interesting short term picture. The failure to breakout after clearing the previous weekly highs continues to spell more downside volatility for the Pacific Peso, where I’m watching support at the 71 level that must hold:

Oil prices exhibited higher volatility alongside European equities as demand concerns continue to mount with Brent crude dropping below the $72USD level, although it slide far further intrasession to break the $70 level. The nascent bounceback still has all the hallmarks of a dead cat bounce as daily momentum inverts and price moves down towards the psychologically important $70 level:

Gold is disappointing the bugs again with another slide back below the $1800USD per ounce level, failing to provide a counter to the other safe havens as concerns over inflation evaporate amid COVID concerns. As I said previously, sentiment alone cannot push the shiny metal higher  but watch for potential support to come up shortly here at the recent weekly highs:

 

 

Glossary of Acronyms and Technical Analysis Terms:

ATR: Average True Range – measures the degree of price volatility averaged over a time period

ATR Support/Resistance: a ratcheting mechanism that follows price below/above a trend, that if breached shows above average volatility

CCI:  Commodity Channel Index: a momentum reading that calculates current price away from the statistical mean or “typical” price to indicate overbought (far above the mean) or oversold (far below the mean)

Low/High Moving Average: rolling mean of prices in this case, the low and high for the day/hour which creates a band around the actual price movement

FOMC: Federal Open Market Committee, monthly meeting of Federal Reserve regarding monetary policy (setting interest rates)

DOE: US Department of Energy 

Uncle Point: or stop loss point, a level at which you’ve clearly been wrong on your position, so cry uncle and get out!

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Comments

  1. My tea’s gone cold
    I’m wondering why I got out of bed at all
    The morning rain clouds up my window
    And I can’t see at all

    And even if I could, it’d all be red
    But your Macro Mornings on my phone
    It reminds me that it’s all so bad
    It’s all so bad

    And I want to thank you

    Thanks Chris!

  2. Here’s Paul Krugman’s recent thoughts on Inflation
    https://www.nytimes.com/2021/12/16/opinion/inflation-economy-2021.html
    It is interesting that he delineates between Inflation that results from simple supply demand imbalances and Inflation which results from Manufacturer/Producer/ Consumer price expectations.
    Yesterday I wrote about a recent conversation about the future Pricing power in High Tech manufacturing.
    Basically high tech manufacturing hasn’t enjoyed real pricing power since the 2000 tech wreck. Ask experienced high tech manufacturing managers to predict product pricing 3 years into the future and they’ll invariably decrease the average selling price by somewhere between 10% and 30% pa. depending on the nature of the item (consumer =-30% while Industrial = -10%). If the manufacturer wants to maintain their gross margin then they need to do so by increasing their yield or decreasing their own make costs.
    My point is that the belief that high tech unit prices are headed south is so universally accepted that it’s almost become religious dogma.
    But what happens when this belief changes?
    What happens when the business plan says that prices increase by 10 pa?
    What happens when your customers willingly sign long term supply contracts with built-in inflation?
    We’re no longer dealing with Inflation resulting from temporary Supply Demand imbalance but rather Inflation resulting from business/price expectations. It is precisely this sort of Inflation which Paul Krugman hopes will not happen, but why?
    Would this sort of Inflation in price expectations really be such an awful outcome?
    If you’ve never written a business plan with negative pricing expectations than you probably don’t understand just how many pretty good ideas get flushed and never reach the product stage because price projections of -30%pa make the product business case very unattractive in years 2, 3 and 4 . Why would any sane person spend money today to develop a product (a year from today) which had such abysmal price expectations?
    Now what happens when we reverse this situation and develop products with positive price expectations? The difference it makes to the business case is absolutely astounding, instead of predicting and exit from the product space in year 4 you’ve got a more valuable product after 3 years profit than you had on day one.
    The positive cash flow implications of this one minor change cannot be over emphasized. A business enjoying positive pricing has little need for additional capital injection because their business operations generate huge wads of cash. Trying to figure out the Market value of a business that has growth, pricing power and hugely positive cashflow is anyone’s guess with valuations starting at 5 times revenue and going up from there.
    All of these points create an environment where start-up and small businesses can grow and transition without continually searching for new sources of cash injection (which invariably dilute the starting equity position)
    All this is possible because we’ve unleashed the daemon which we call Inflation. This Inflation doesn’t sound so much like the boogey monster we learned about in high school economics, or am I just missing something….

    • The Traveling Wilbur 🙉🙈🙊

      Great comment. 👍

      Government subsidised wheelbarrows (and lampposts) for everyone! 😉